Economics Department


Date of this Version

September 1989


This project has been performed under subcontract to The Cadmus Group, Inc. It is funded with federal funds from the U. S. Environmental Protection Agency, Office of Environmental Planning under contract number 68-01- 7363. The content of this publication does not necessarily reflect the views or policies of the U.S. Environmental Protection Agency, nor does mention of trade names, commercial products, or organizations imply endorsement by the U. S. Government.


The purpose of this report is to explain and evaluate six different methodologies for the valuation of externalities and public goods with respect to natural resources and the ecosystem. The six methodologies are: 1) general systems analysis, 2) the social fabric matrix, 3) direct cost, 4) contingent valuation, 5) travel cost, and 6) the property approach. The explanation and analysis contained in this report intends to determine their applicability to a broad definition of an ecosystem or socioecosystem.

The concept of externalities in the field of economics is essentially a concept formulated to take account of interdependence in a model based on assumptions of independence. Externalities, or external effects, is one of the characteristics used by economists to judge whether a good or service is a public good or service which should be provided by government. External effects are referred to by such names as “externalities,” neighborhood effects, ” “social costs,” ”third-party effects,” “spillover effects,” and so forth. Externalities are those gains or losses which spill over onto others from the economic units initiating the economic actions. The economic units--firms or households, for example--either do not include the externalities in their decisions, or are not held accountable for them. The collective interest is at stake with regard to external effects and thus, the government is given the responsibility for such effects.

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